Report of the Commission on Government ... - Bayhdolecentral
Report of the Commission on Government ... - Bayhdolecentral
Report of the Commission on Government ... - Bayhdolecentral
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Selected Issues <str<strong>on</strong>g>of</str<strong>on</strong>g> LiabiIity<br />
and <str<strong>on</strong>g>the</str<strong>on</strong>g> extent to which <str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>Government</strong>, or<br />
its suppliers, should bear such a risk.<br />
THE ROLE OF INSURANCE<br />
Most suppliers carry some form <str<strong>on</strong>g>of</str<strong>on</strong>g> general or<br />
product liability insurance providing financial<br />
protecti<strong>on</strong> for claims resulting from loss or<br />
damage caused by defective products. However,<br />
we have been unable to obtain detailed data <strong>on</strong><br />
specific types and amounts <str<strong>on</strong>g>of</str<strong>on</strong>g> coverage. Despite<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> lack <str<strong>on</strong>g>of</str<strong>on</strong>g> specific details regarding premium<br />
costs and <str<strong>on</strong>g>the</str<strong>on</strong>g> extent <str<strong>on</strong>g>of</str<strong>on</strong>g> product liability coverage,<br />
a number <str<strong>on</strong>g>of</str<strong>on</strong>g> basic facts about product<br />
liability insurance and insurance practices can<br />
be verified.<br />
"Product liability" is comm<strong>on</strong>ly understood<br />
to mean liability <str<strong>on</strong>g>of</str<strong>on</strong>g> a c<strong>on</strong>tractor for injury to<br />
pers<strong>on</strong>s or property caused by its defective<br />
products, and includes liability to third parties<br />
who are not parties to <str<strong>on</strong>g>the</str<strong>on</strong>g> c<strong>on</strong>tract. Such liability<br />
to third pers<strong>on</strong>s is insurable, and most<br />
manufacturers and suppliers carry product liability<br />
insurance for third-pers<strong>on</strong> liability.<br />
However, product liability insurance is not intended<br />
to be a guarantee <str<strong>on</strong>g>of</str<strong>on</strong>g> good workmanship;<br />
it does not normally cover loss <str<strong>on</strong>g>of</str<strong>on</strong>g> or damage to<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> product itself nor <str<strong>on</strong>g>the</str<strong>on</strong>g> cost <str<strong>on</strong>g>of</str<strong>on</strong>g> repair, replacement,<br />
or removal <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> product.<br />
Military aircraft, missiles, space systems,<br />
and o<str<strong>on</strong>g>the</str<strong>on</strong>g>r complex products, including spare<br />
parts and comp<strong>on</strong>ents, which are destroyed or<br />
severely damaged, are not generally included<br />
in <str<strong>on</strong>g>the</str<strong>on</strong>g> premium rate <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> manufacturer and<br />
its comp<strong>on</strong>ent manufacturer's product liability<br />
insurance coverage.<br />
Nei<str<strong>on</strong>g>the</str<strong>on</strong>g>r commercial nor <strong>Government</strong> product<br />
liability insurance covers <str<strong>on</strong>g>the</str<strong>on</strong>g> "business risk"<br />
<str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> failure <str<strong>on</strong>g>of</str<strong>on</strong>g> a product to perform its<br />
intended purpose due to improper design or<br />
specificati<strong>on</strong>. An example <str<strong>on</strong>g>of</str<strong>on</strong>g> an uninsurable<br />
business risk is <str<strong>on</strong>g>the</str<strong>on</strong>g> costly recall situati<strong>on</strong>, or<br />
"sistership" liability, such as liability caused by<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> grounding <str<strong>on</strong>g>of</str<strong>on</strong>g> all aircraft <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> same type.<br />
It is not uncomm<strong>on</strong> for <str<strong>on</strong>g>the</str<strong>on</strong>g> product liability<br />
insurance carried by industry to cover both its<br />
commercial and <strong>Government</strong> work. This is esipecially<br />
true at <str<strong>on</strong>g>the</str<strong>on</strong>g> subc<strong>on</strong>tractor and supplier<br />
I.evel.<br />
The premium costs for product liability. innirance<br />
are determined or structured by loss<br />
rxperience, and experience with a particular<br />
company is nearly always <str<strong>on</strong>g>the</str<strong>on</strong>g> major or c<strong>on</strong>trolling<br />
factor in setting premium rates. Costs<br />
for premiums are reflected in c<strong>on</strong>tract pricing<br />
through a number <str<strong>on</strong>g>of</str<strong>on</strong>g> different accounting methods.<br />
Often, such premium costs are allocated<br />
to an overhead expense pool which is <str<strong>on</strong>g>the</str<strong>on</strong>g>n<br />
prorated as part <str<strong>on</strong>g>of</str<strong>on</strong>g> an indirect expense rate<br />
against all c<strong>on</strong>tracts. Sometimes costs may be<br />
charged as a direct expense to a c<strong>on</strong>tract. Some<br />
companies segregate amounts for military insurance<br />
coverage from commercial coverage.<br />
Because premium costs are determined by<br />
loss experience and <str<strong>on</strong>g>the</str<strong>on</strong>g> exposure to liability<br />
for such losses, <str<strong>on</strong>g>the</str<strong>on</strong>g>re is a direct relati<strong>on</strong>ship<br />
between costs paid by <str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>Government</strong> in its<br />
c<strong>on</strong>tract prices (directly or indirectly) and<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> amount <str<strong>on</strong>g>of</str<strong>on</strong>g> damages it recovers as a result<br />
<str<strong>on</strong>g>of</str<strong>on</strong>g> loss or <str<strong>on</strong>g>of</str<strong>on</strong>g> damage to <strong>Government</strong> property.<br />
PRICING<br />
Finally, <str<strong>on</strong>g>the</str<strong>on</strong>g> present uncertainty and vagueness<br />
<str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> extent <str<strong>on</strong>g>of</str<strong>on</strong>g> c<strong>on</strong>tractor and supplier<br />
liability for loss <str<strong>on</strong>g>of</str<strong>on</strong>g> or damage to <strong>Government</strong><br />
property have made it difficult to price <str<strong>on</strong>g>the</str<strong>on</strong>g><br />
risks involved adequately or accurately.<br />
Warranties in <strong>Government</strong> c<strong>on</strong>tracts pose a<br />
nearly insoluble pricing problem. While <strong>Government</strong><br />
policy allows <str<strong>on</strong>g>the</str<strong>on</strong>g> inclusi<strong>on</strong> <str<strong>on</strong>g>of</str<strong>on</strong>g> a factor<br />
in <str<strong>on</strong>g>the</str<strong>on</strong>g> price to cover <str<strong>on</strong>g>the</str<strong>on</strong>g> cost <str<strong>on</strong>g>of</str<strong>on</strong>g> including a<br />
warranty, <str<strong>on</strong>g>the</str<strong>on</strong>g> c<strong>on</strong>tractor's difficulty is <strong>on</strong>e <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
establishing some reas<strong>on</strong>able basis for predicting<br />
warranty costs for a product being produced<br />
for <str<strong>on</strong>g>the</str<strong>on</strong>g> first time. The problem is fur<str<strong>on</strong>g>the</str<strong>on</strong>g>r<br />
complicated because postacceptance <strong>Government</strong><br />
remedies are provided for in so many different<br />
standard clauses and are stated to be "n<strong>on</strong>exclusive";<br />
that is, are merely remedies in additi<strong>on</strong><br />
to whatever o<str<strong>on</strong>g>the</str<strong>on</strong>g>r remedies may exist under<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> law.<br />
CONCLUSIONS<br />
A lack <str<strong>on</strong>g>of</str<strong>on</strong>g> a clear and explicit definiti<strong>on</strong> <str<strong>on</strong>g>of</str<strong>on</strong>g><br />
postacceptance rights <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> <strong>Government</strong> and<br />
obligati<strong>on</strong>s <str<strong>on</strong>g>of</str<strong>on</strong>g> c<strong>on</strong>tractors and suppliers increases<br />
<str<strong>on</strong>g>the</str<strong>on</strong>g> probability <str<strong>on</strong>g>of</str<strong>on</strong>g> disputes and litigati<strong>on</strong>.<br />
It places indefinite risk <strong>on</strong> c<strong>on</strong>tractors<br />
and suppliers because <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> inability to predict<br />
or determine <str<strong>on</strong>g>the</str<strong>on</strong>g> extent <str<strong>on</strong>g>of</str<strong>on</strong>g> <str<strong>on</strong>g>the</str<strong>on</strong>g> exposure to<br />
liability. Fur<str<strong>on</strong>g>the</str<strong>on</strong>g>r, <str<strong>on</strong>g>the</str<strong>on</strong>g> lack <str<strong>on</strong>g>of</str<strong>on</strong>g> a clear statement<br />
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